Paycheck Protection Program Flexibility Act of 2020

June 12, 2020 Steven M. Goldstein COVID-19

Congress eases Paycheck Protection Program requirements.

On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act of 2020 (PPPFA). This Act modifies aspects of the Paycheck Protection Program created by the CARES Act to provide relief to small businesses impacted by the COVID-19 pandemic.

The purpose of the PPPFA is to ease some of the requirements imposed by the Small Business Administration (SBA) in its implementation of the PPP loan program, and the PPPFA certainly accomplishes that.

PPPFA Highlights

The PPPFA extends the covered period for a PPP loan to the earlier of (a) 24 weeks from loan origination or (b) December 31, 2020. Previously, proceeds from a PPP loan had to be spent within the eight-week period from loan origination. The extension will allow businesses that are just now reopening, such as restaurants and bars, to have more time to spend their PPP loan proceeds since many were closed and did not have payroll costs during the shorter covered loan period under the CARES Act.

The new law also changes the requirement that 75% of the PPP loan proceeds must be used for payroll purposes in order to qualify for loan forgiveness. That requirement now is set at 60%. The other 40% must still be used for payment of a mortgage, rent, or utilities.

Under the CARES Act, eligibility for full loan forgiveness was based in part on the number of full-time employees (FTEs) as of June 30, 2020, to those employed during a prior comparison period. Loan forgiveness is reduced proportionately if the borrower’s FTEs are less at that time than during the comparison period. Thus, if a borrower could rehire workers to have a sufficient number of FTEs to allow it to avoid this proportionate reduction, the borrower needed to do this by June 30, 2020. The PPPFA extends until December 31, 2020, the time to rehire employees in order to avoid this proportionate reduction in loan forgiveness.

The PPPFA changes the method of determining whether a borrower qualifies for loan forgiveness based on the number of employees it has retained. If the borrower can document in good faith that it is unable to rehire one or more employees for certain reasons, the amount of loan forgiveness will not be reduced based on those employees not being rehired. The reasons for failing to rehire under this exception are either of the following:

  • An inability to rehire an employee who was employed as of February 15, 2020, or an inability to hire a similarly qualified individual. This will prevent a borrower from being penalized if an employee chooses to not come back to work, due to the employee’s fear for his/her safety, for example.
  • The borrower is unable to reopen to the same level as before the crisis due to it having to comply with requirements for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. However, this exception is limited to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning March 1, 2020, and ending December 31, 2020. Thus, an inability to reopen due to a need to comply with a state requirement, such as a Governor’s Executive Order, would not qualify for this exception, unless that state requirement is incorporating the federal requirement or guidance.

The PPPFA extends the deferral of the loan repayment obligation to the date when the SBA determines the borrower’s eligibility for loan forgiveness and remits that determination to the lender. However, if the borrower fails to apply for loan forgiveness within ten months after the end of the loan’s covered period, then payments will start at that time. Even this provision results in an extension because the covered period has been extended under the PPPFA to December 31, 2020. Previously, loan repayment was deferred for a minimum of six months but not more than one year.

The new law also allows recipients of PPP loans to be eligible for the deferral of payroll taxes that was included in the CARES Act. That deferral provision of the CARES Act allows businesses to defer the employer portion of their 2020 Social Security payroll tax obligations, so that one-half is payable on December 31, 2021, and the remaining one-half is payable on December 31, 2022. Previously, a business could not take advantage of that benefit if it received a PPP loan.

Finally, the PPPFA extends the maturity date for repayment of a PPP loan to five years, from the previous loan term of two years. This provision only applies to new PPP loans issued after the passage of the PPPFA. The language of the PPPFA specifically permits (but does not require) lenders to mutually agree with borrowers of existing PPP loans to extend the maturity date on their loans.

Sacks Tierney has qualified attorneys to answer your questions about the PPP loan program and to help guide your business if you require assistance.